Finally, a “go-to” resource for Payroll Auditing.

Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Over the next few weeks, Phil Vivirito, Bond Beebe’s Director of Payroll and Compliance Auditing, will explain several fundamental payroll auditing principles.  This week he reviews the best practices for finding and analyzing unreported employees.

A population test determines if all eligible employees are being reported by identifying all the employees on the payroll and accounting for everyone.  If you have a year-to-date non-departmentalized payroll or W-2s, you can compare either to the Fund’s contribution reports.

Any employee on this payroll and not reported would prompt analysis to determine why they were not reported.  The simplest way would be to ask the employer; you will want job classifications and may need to look at personnel files.  You can also substantiate this information by checking wage rates to determine if the unreported employees are not at the prevailing wage rates in the collective bargaining agreement.  If the employer informs you that these employees are covered by another plan, ask for proof, such as that plan’s contribution reports.  You will also need to use some common sense; the employer’s explanation of unreported employees may not fit with the type of work being performed (e.g., too few truck drivers for a trucking company or more office people than electrical workers in an electrical contractor).

If I have any doubt about whether or not the employee is doing covered work, I will include the employee as an audit finding until the employer can prove otherwise.  I have had many instances in which an employer could not tell me an employee’s job function.  I always take the position that an employer must know what every employee does.  Otherwise, why hire that person?

Outside of the payroll records (W-2s, payroll journals, time cards, and quarterly reports), there are other ways to find unreported employees.  You also should be able to look at cash disbursement journals, the general ledger, 1099s (and the 1096), and temporary labor agency invoices.  Any names that appear in the cash disbursement or general ledger should be questioned and investigated.  The same is true for individuals who are issued 1099s.  If the employer is using a temp agency to obtain individuals to perform covered work, the invoices from the agency will list the individuals and their hours.  In certain instances in construction trade audits, you may even find a disproportion in the amount of materials to labor, and that an employer is hiding covered employees.

With a little extra research, unreported employees can be found and properly analyzed during the payroll audit process.

Written by Phil Vivirito
Bond Beebe
P: 301.272.6090 E:  This e-mail address is being protected from spambots. You need JavaScript enabled to view it

As payroll auditors, one of our tasks is to determine if the employer is reporting all covered employees.  This includes employees working in covered job classifications or bargaining unit employees. However, an employer may use different terminology when referring to covered and non-covered employees. This can be somewhat annoying to the experienced auditor, but it can become confusing and troublesome to the new or inexperienced payroll auditor.

Some employers may call non-covered employees ‘non-union’; other employers may refer to an employee who did not join the union as ‘non-union’ even though he is working in a covered classification. In both cases the employer may not report this employee due to his/her non-union status. In the first case, the employer’s terminology would be correct; but in the second case, the employer would be incorrect. The employer may do the same with the non-bargaining unit terminology, referring to a person as a non-bargaining unit just because he/she did not join the union.

There are other instances where terminology can be confused, such as referring to summer help – the employer’s definition may not be the official definition as stated in the Collective Bargaining Agreement (CBA). Another common mix-up is probationary period - union probation verses wait time before contributions are to begin. There may even be confusion with eligibility. The CBA may state that contributions are due to a health fund on the employee’s date of hire and he/she becomes eligible for those benefits after 60 days; an employer may mistakenly wait 60 days before making contributions.

Finally, there is possible confusion concerning a right-to-work state. In a right-to-work state, an employee does not ever have to join the union. However, if that employee is working in a covered job classification, contributions are required by the employer on his/her behalf. Many employers assume that in a right-to-work state, contributions are not required for those employees who are not union members.

There may be other instances of confusion with language and some may be specific to certain industries. If anyone has other examples, please share in the comments section.

Written By Larry Beebe
Bond Beebe
P: 301.272.6025 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Payroll auditors continue to debate whether payroll audit programs should be rigid or flexible.  Here is what our book, Payroll Auditing: A Guide for Multi-Employer Plans, says on the subject:

There are two types of audit programs.  One is very rigid.  The auditor must perform every step in the audit program and should not deviate from the steps shown.  The other audit program allows flexibility and audit judgment on the part of the auditor.  Certain steps in the program will always be performed, and others will be performed based on the circumstances the auditor finds in auditing each employer.

Should payroll audits be performed using a rigid payroll audit program or a flexible audit program?  If the auditor is inexperienced, a rigid program may be appropriate for the first few audits performed.  Under normal circumstances, however, a flexible audit program is best suited to the performance of an efficient payroll audit.  Every payroll audit is different.  Some employers are large and some are small.  Some employ only workers covered by the collective bargaining agreement (CBA) and some employ many trades.  Some employers’ payroll records are simple and others have complicated records.  The rigid payroll audit program attempts to fit all circumstances.  Performance of every step in an audit program designed to fit all circumstances can result in inefficient payroll audits.  If trustees adequately train their auditors, the trustees can be given flexibility in performing the audit.

This is our humble, but experienced opinion.  We suspect, however, that the debate will continue among some auditors.